Why America Will Lead the Next Oil Boom

The last word on oil... Why America will lead the next oil boom... Don't miss tonight's big event... In the mailbag: The big lie about electric cars...

Editor's note: In today's Digest, Stansberry Research senior resource analyst Flavious Smith concludes his series on the oil markets. Read on to learn why he believes the United States will lead the next oil boom. (And don't miss the mailbag, where Porter addresses a critic of his "Oil $500" prediction.)

As I (Flavious) mentioned yesterday, I think oil prices are going much, much higher over the next 10 to 20 years...

Surging demand from places like China and India will create a boom unlike any we've seen in decades... maybe ever. Porter and I agree that we could see $500 per barrel or more before it's all said and done.

I also expect that for the first time in our lifetimes, the United States – rather than OPEC – will become the world's most important oil producer.

Why? Because no one else is as perfectly positioned to meet the demand for more oil...

If you've been a Stansberry Research reader for long, you know that new technologies like horizontal drilling and hydraulic fracturing ("fracking") have transformed the oil business.

They have not only unlocked a whole lot of oil that wasn't available before... but they've also made getting that oil out of the ground cheaper and less risky than ever before.

For generations, oil was drilled one way. We drilled straight down into the ground. But these "conventional" vertical wells are a crapshoot. Only one out of 10 wells drilled this way produces enough oil to make a profit.

This means that one good well has to make enough money to cover the cost for all 10. That's an expensive and risky way to do business... But for years, that's all we had.

But these new technologies have completely flipped the equation... Today, as many as nine out of 10 "unconventional" horizontal wells are productive. We can spend a heck of a lot less money and produce more oil per well. And as I like to say, more oil plus less cost equals more profit.

Who will reap the biggest rewards from the coming boom?

Naturally, it's going to be the companies with the most experience and expertise using these new technologies. And it just so happens they're located right here in the U.S. of A.

Fact is, our exploration and production ("E&P") companies are the best in the world at both finding and producing new sources of oil.

They're the ones who created and developed these new technologies in the first place... And they're years ahead of the rest of the world at putting them to use. Because of this, they'll be the first to react when demand rises and prices start to move higher.

Of course, the companies that will benefit the most will be those that also own the best deposits in areas like the Bakken Shale in North Dakota, the Eagle Ford Shale in South Texas, and – best of all – the Permian Basin in West Texas and southeastern New Mexico.

The Permian Basin has a competitive advantage over the others. It has huge reservoirs of shale oil and tight-sand oil... And in many places, these are "stacked" on top of each other. This allows a company to access many formations from a single piece of land.

Because the Permian has also been a big conventional oil producer since the 1920s, it already has extensive infrastructure to transport oil to the market. And it's directly connected to one of the world's largest oil storage areas in Cushing, Oklahoma.

But the biggest advantage of the Permian is simple: It makes a ton of money. All but four zones there are profitable at today's prices... And more than half are profitable at $40 per barrel.

Fact is, despite the big drop in prices, America's best oil companies are already doing well...

But they're going to make an absolute killing when prices finally start to rise. And I'm going to do everything I can to make sure Stansberry Research readers are along for the ride.

As I mentioned yesterday, Porter and I will be covering all this and a whole lot more during our live webinar tonight. We'll even give you the name of one of our favorite oil firms – absolutely free – just for showing up.

It kicks off at 8 p.m. Eastern time sharp... I hope to see you there. Click here to sign up now.

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In today's mailbag, a thank you from a longtime subscriber... and Porter and Flavious respond to several questions about tonight's event. Again, if you haven't reserved your spot, it's not too late to join us. Click here for the details. And be sure to let us know what you think at feedback@stansberryresearch.com.

"Just wanted to say – you guys are SOO good. Really enjoy your comments back to comments sent in, and I really appreciate you taking the time and energy to actually read the emails and then make spot-on responses. Nobody I can think of does that but you." – Paid-up subscriber Gail Chapel

"Flavious seems to be a good addition to your team. A strong oil focus. Good. The upswing starts with the drillers. Wonder if Flavious would agree? And ask Flavious if he knew Dallas Smith of Midland, Texas." – Paid-up subscriber Allen W.

Flavious comment: Thanks for the vote of confidence. It's great to be part of the Stansberry team. Yes, as energy prices rise, drilling contractors usually get an early boost. Problem is, they also get hit first as prices fall. And no, I don't know Dallas Smith, but I do have many friends in Midland.

"Well your webinars are always informative and educational. I may be jumping the gun on submitting questions, but it would be nice to hear about the byproducts also, like natural gas, propane and the shipping demand. As always, the anticipation before these webinars by Stansberry is killing me. Can't wait." – Paid-up subscriber Tony W.

Flavious comment: Glad you'll be joining us this evening. The natural gas side is pretty bleak right now. Summer is upon us, and prices just fell below $3. Working gas in storage is approaching the five-year mean after running at or near the top of the five-year average through the winter months. But production is set to increase by 1 billion cubic feet per day in 2017. And all this oil drilling in the Permian will add a lot of gas to the system. I've been looking at propane and the other "anes." I'll have some more on this tonight.

"I have long respected Porter's ability to recognize economic realities before most people, but I fear that [your] analysis of the longevity of demand for oil is flawed. After all, oil is even more slippery than banana peels! [You guys] sound a bit like a Kodak executive in 2000!

"The most significant argument for electric cars is based on 20 parts per drive train, compared to 2,000 for internal-combustion engines. Electric cars are consequently very much cheaper to maintain. The battery life issue seems now to have been resolved, with some batteries already lasting well over 200,000 miles (the expectation is for 1 million), and the re-charging time may be down to less than 10 minutes using graphene technology. And then there is the impact on demand of car sharing and autonomous operation. There will come a time when it will be far cheaper to hire a self-driving electric-powered taxi than to drive the car rusting in your driveway.

"And [your] reliance on increased demand from China and India is also suspect. India said last month that it plans to sell only electric cars by the end of the next decade! China has a national, massive commitment to pollution-free energy, and is by far the largest electric car market, accounting for more than 40 percent of the electric cars sold in the world and more than double the amount sold in the United States. (Granted only 0.2% of total light-duty vehicles, but we know what exponential growth can do!) The primary use for oil will be for tarmac and ships, and not at $500 per barrel – sorry, Flavius and Porter!" – Paid-up subscriber Nick A.

Porter comment: Your view that there will come a time when it's "cheaper to hire a self-driving electric-powered taxi than to drive the car rusting in your driveway" is likely correct. But it's awfully hard to say when that will occur.

The best work at forecasting these trends has been done by the consultants at McKinsey. (You can see one of the company's older studies here.) McKinsey's latest report from 2016 says:

Given current system costs and pricing ability within certain segments, companies that offer EVs face the near-term prospect of losing money with each sale. Under a range of scenarios for future battery cost reductions, cars in the C/D segment in the US might not reach true price parity with ICE vehicles (without incentives) until between 2025 and 2030, when battery pack costs fall below $100/kWh, creating financial headwinds for automakers for the next two to three product cycles.

There's a big difference between being able to produce electric cars and batteries that last a million miles... and being able to sell them at a cost that's competitive. In the real world, electric cars are still vastly more expensive than "direct carbon" vehicles.

While most people believe the rapid growth of both solar power and electric cars is a testament to the relative value of these technologies over legacy forms of energy and transportation, that's just not true – yet. What's really happening is a corruption of governments around the world.

Most people aren't ethical enough to avoid participating in schemes that force your neighbor to pay your electric bill, through "net metering" rules. So we have solar panels on rooftops. Likewise, most people are willing to allow their neighbors to pay for their luxury cars.

I have no objection to solar power or electric cars. What I do object to, strenuously, is the government forcing people to pay more for electricity or transportation than is necessary. In my view, the government should simply be the "referee" between various competing technologies and allow the free market to decide which is best.

So far, it's clear that neither solar power nor electric cars can win in that arena. How do we know? Sales of all types of electric vehicles (both plug-ins and hybrids) in Denmark fell more than 60% this year.

What happened? The tax subsidies favoring electric vehicles over "direct carbon" vehicles were eliminated. And demand for electric cars has plummeted as a result.

I suspect what's going to happen is a mix of development. Yes, batteries and electric cars will get better and better. But don't forget... the electricity for those cars has to come from somewhere. Batteries don't make energy, they store it. There will be big costs associated with growing the base power loads and the power grids as the shift toward electric vehicles grows.

In total, about half a million electric cars have been sold in the U.S. But more than 15 million cars are sold every year. It's going to take a long, long time – even after 2025 or 2030 – for gas-powered vehicles to disappear. And that's just in the U.S.

In places like India and China – where coal is the primary source of electricity – the move toward electric cars won't come until much later. And again... you can't forget that the power for those cars will have to come from somewhere. Liquefied natural gas? Coal? Oil?

And – although this wasn't discussed directly – I have to address what I'm sure is an associated question to any discussion about solar power or electric cars...

The "world improvers" among you will surely protest that without the government's "help," new technologies like solar power and electric cars can't get off the ground.

That argument is absurd. The truth is actually the opposite. The worst thing that can happen to any new technology or industry is the government's "help."

Look at the National Institutes of Health. How many cancer breakthroughs has the government's "help" created during its 40-plus-year "war on cancer" and trillions in spending? Zero.

How about private industry? The single most crucial breakthrough for studying cancer was PCR, a chemical chain reaction that enables genetic research. It was invented in 1985 by Kary Mullis, at a tiny biotech startup in California called Cetus Corporation.

You'll never guess what happened to Cetus. The government drove the company out of business by delaying approval of Interleukin 2, its new cancer drug. Its PCR patents ended up being sold to Roche. Its other technology was sold to Chiron, which eventually sold to Novartis. In this way, some of America's best and most valuable intellectual property was sold to Swiss drug companies.

Great job, America! What would we do without all of the "help" we've gotten from the government?

Without the government's subsidies favoring solar power and electric cars, maybe natural gas would have boomed. Or maybe diesel-powered cars would have taken off. (Diesel-powered cars can easily get 50 MPG, and some commercially built diesel cars get almost 100 MPG.)

But we'll never know what technologies should have been developed because the government decided for us that it was going to be solar power and electric cars.

Let's see... How did all of those government-backed solar companies turn out? Anyone know? How's Solyndra doing these days?

Regards,

Porter Stansberry and Flavious Smith
Baltimore, Maryland
June 14, 2017